Mid-sized corporate loan defaults rising

Rising defaults, confined till recently to housing loans, personal loans and loans to small and medium enterprises (SMEs), have spilled over to big ticket loans. Banks are facing increasing delinquencies by overleveraged mid-sized companies, now caught in hardships due to changes in their operating environment.

The defaulting mid-sized companies had availed of large amounts of cheaper credit during the lending boom of the last few years, helped by their good credit history. These companies are paying a price for over-leveraging themselves, with interest rates having risen sharply in the last one year, certain export-dependent segments taking a hit due to slackening demand from target markets and a sales slowdown in segments such as automobiles. 

DEBT WORRIES Commercial banks performance indicators (%)
	2006-07			2007-08
	Q1	Q2	Q3	Q4	Q1
Gross NPAs to gross advances**
Scheduled commercial banks	3.40	3.20	3.00	2.70	2.80
Public sector banks	3.80	3.50	3.30	2.80	2.90
Old private sector banks	4.70	4.50	3.80	3.20	3.10
New private sector banks	1.90	2.00	2.20	2.10	2.50
Foreign banks	1.90	2.10	2.00	1.90	2.00
Net NPAs to net advances*
Scheduled commercial banks	1.20	1.20	1.20	1.10	1.20
Public sector banks	1.30	1.30	1.20	1.20	1.20
Old private sector banks	1.70	1.60	1.30	1.00	0.90
New private sector banks	0.90	1.00	1.10	1.10	1.30
Foreign banks	0.70	0.90	0.90	0.70	0.80
* Annualised to ensure comparability between quarters ** Position as at the end of the quarter Source: Off-site supervisory returns submitted by the banks pertaining to the domestic operations

Each bank has a different definition of mid-sized companies and hence, an estimation of defaults for the banking industry as a whole is not available. The country's largest lender, State Bank of India (SBI), defines a mid-sized company as one with an annual turnover of Rs 50-Rs 500 crore.

The overall gross non-performing assets (NPAs) in case of SBI rose to 3.13 per cent at the end of June 2007 from 2.92 per cent a quarter earlier, but gross NPAs in the mid-corporate segment rose sharply from 1 per cent to more than 2 per cent, a senior SBI official said. SBI's gross NPAs in the first quarter of 2007-08 increased by Rs 759.35 crore.

"There has been an increase in NPAs across loan portfolios, retail, SME and mid-sized corporates. These corporates had a good credit history in the last 10-20 years, but had over-leveraged themselves (in recent years)," said a senior State Bank of India (SBI) official. SBI's advances to mid-sized corporates stood at Rs 87,462 crore at the end of June 2007, an increase of 34.7 per cent from a year earlier.

Bankers consider a debt-equity ratio of 3:1 (a company borrowing Rs 300 for every Rs 100 of equity capital) as reasonable. The now defaulting mid-sized companies had overstretched themselves when the going was good and ended up with leverage ratios far in excess of levels considered comfortable by banks.

Banks, in a frenzy to cash in on the credit boom during the three years beginning 2003-04, allowed credit controls to loosen and lent to corporates at rates which were 2-3 per cent lower than the then prevailing prime lending rates (PLRs). However, banks' PLRs have increased by 250-300 basis points in the last one year. One basis point is one-hundredth of 1 per cent. The banks saw an unprecedented credit growth of around 30 per cent for over three years, led by retail lending.